TAXATION

Cost Segregation Industry Update

An engineering-based cost segregation study traditionally has been used to reclassify federal tax depreciation rates of real property from one lump-sum asset, listed in a fixed asset system as a “building” with a recovery period of 39 years, to multiple detailed entries that identify separate assets with shorter recovery periods, such as five, seven or 15 years. A study not only results in correctly identifying both the 1250 and 1245 components of a structure but also establishes a starting point for federal tax depreciation assets. Over the last several years, there have been many tax law changes that affect how and why a competent study should be performed. Most recently (June 1), the Internal Revenue Service issued an updated Cost Segregation Audit Techniques Guide (ATG). The guide includes detailed descriptions of the different types of studies, what should be included in a competent study and all of the previously issued specific industry directives that show what assets might be typically considered as 1250 or 1245 property. It is important to note that these documents are not considered to be law but should be used only as a guide. Tax law changes over the last few years are numerous. Following are some significant modifications that have impacted the cost segregation industry.

The Tax Cuts and Jobs Act of 2017 (TCJA)

Bonus depreciation was increased to 100% through Dec. 31,

By Mark 2022, and then reduces to 80% for 2023. Vorkapich, ASA In regard to modified accelerated cost recovery periods (MACRS), real property will continue to be depreciated over 39 years for nonresidential property and 27.5 years for residential rental property. The previous requirement for property to be “original use” has been eliminated. Now, in order to qualify for bonus depreciation, the original use does not begin with the initial property owner but when the building is placed into service with the current property owner (including acquired property). This means bonus depreciation now applies to both newly constructed buildings and used property acquired after Sept. 27, 2017. For example, a retail strip mall is acquired, and a cost segregation study is performed to identify all of

the appropriate 1250 and 1245 improvements. All those assets with a less than 20-year life will qualify (after Sept. 27, 2017) for 100% bonus depreciation and thus may be entirely deducted in the current year. Land improvements are considered 15-year property under MACRS (Asset Class 00.3) and thus will be able to be fully deducted in the current year; however, they need to be correctly identified and classified, and a proper cost segregation study accomplishes this. The Protecting Americans From Tax Hikes (PATH) Act of 2015 introduced the category of Qualified Improvement Property (QIP) as any improvement to an interior portion of a building that is nonresidential real property, as long as that improvement is placed in service after the building was first placed in service by any taxpayer (Section 168(k)(3)). It specifically excludes expenditures for (1) the enlargement of a building, (2) elevators or escalators and (3) the internal structural framework of a building. The QIP provisions are effective for property placed in service after Dec. 31, 2015. The TCJA eliminated the separate definitions of qualified leasehold improvements, qualified restaurant improvements and qualified retail improvements. These have all been replaced with the general grouping of QIP. The depreciable life of QIP was to be reduced from 39 to 15 years, with 100% bonus depreciation being available for all assets with a life of 20 years or less. Unfortunately, Congress forgot to give QIP a 15-year life, and it remained 39 years and was not eligible for 100% bonus depreciation. As a result, the taxpayers who spent $2 million on qualified interior improvements to their property did not receive a $2 million deduction in that current year but had to depreciate the entire amount straight-line over 39 years.

The QIP technical correction

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a technical correction for QIP property, allowing bonus depreciation or special straight-line MACRS depreciation over 15 years instead of 39 years, while making the change retroactive to Jan. 1, 2018. Net operating loss generated by the additional depreciation may be carried back for up to five years to recover taxes previously paid. Going forward, all QIP property is eligible to be deducted at a rate of 100% (2022) and 80% (2023).

Final regulations of Section 263(a)

Under the final regulations of Internal Revenue Code (IRC) Section 263(a) (effective Jan.1, 2014 — also see T.D. 9636), a building and its structural components are considered a single unit of property. The “unit of property” for buildings consists of the building structure and building systems — which include the heating, ventilation and air conditioning system, plumbing systems, electrical system, all escalators and elevators, fire protection and alarm systems, security systems, gas distribution systems and other structural components identified in published guidance. In addition to defining the unit of property for tracking expenditures, the IRS has separately issued regulations (IRC Section 168) detailing the rules for dispositions and partial dispositions of depreciable assets that include building structural components. Prior to Jan. 1, 2012, losses were not allowed for retired building components; consequently, the replacement of building components resulted in the continued depreciation of both the replaced and replacement property. The IRS has established a facts-based approach to determining whether work performed on a building or leasehold improvement should be considered a deductible repair or a capital expense. Under these rules, the taxpayer can end depreciation of building components upon removal and recognize a loss. A proper cost segregation study includes costs by building system and will facilitate a taxpayer’s accurate reporting of losses when the component is disposed. In the case of existing property, the study should take into consideration the taxpayer’s fixedasset accounting of the building’s historical cost and aid in the identification of disposals that will occur as a result of the new capital improvements. The numerous tax law changes have impacted how a cost segregation study is performed and its methodology. It has become very complex when taking into account all of the different modifying rules. An engineering-based study that takes all of these rules into consideration is an essential part of the process in order to not only correctly identify the significant depreciation deduction, which will offset taxable income, but also correctly set up the starting point for federal tax depreciation.

Over the last several years, there have been many tax law changes that affect how and why a competent study should be performed.

Mark Vorkapich, ASA, is the director of cost segregation services at Gladstone Strategies & Solutions in Milwaukee. He has been performing cost segregation studies for over 20 years. Contact him at 414-418-8953 or mvorkapich@gladstonestrategies.com.

LeRoy C. Schmidt, CPA (1941 – 2022)

LeRoy C. Schmidt, CPA, of Brookfield, passed away on Wednesday, June 29, at the age of 81. He graduated from the University of Iowa in 1963 and subsequently became a CPA with Deloitte & Touche in Milwaukee. After retiring from his longtime position there, LeRoy served as executive director of the WICPA from 1990 to 2006.

A passionate promoter of the CPA profession, Leroy was actively involved in the WICPA from the time he joined in 1966. He participated in nearly every WICPA committee at one time or another as well as the AICPA Council. In 1989, he was named WICPA Committee Chair of the Year.

LeRoy’s proudest accomplishments were his involvement and successes in legislative advocacy. He was instrumental in passing the 150-hour legislation for CPA licensure in Wisconsin. He also helped to establish the Young Entrepreneurial Scholars (YES) program in collaboration with the National Association of Black Accountants (NABA) and Bill Coleman, CPA. Scholarships through the WICPA Educational Foundation were renamed to the LeRoy C. Schmidt 150-hour Scholarship after his retirement from the WICPA.

Tammy J. Hofstede, WICPA president & CEO, stated, “LeRoy brought many gifts and influence to the profession, our members and staff — including his mentorship, support and encouragement to me personally. I attribute my career and success to what he taught me about accounting, business and advocacy. He will not be forgotten.”

LeRoy is survived by his wife of almost 57 years, Judy; three daughters: Dawn Stoughton, Debra Schmidt and Susan (Tom) Dwyer; five grandchildren and one great-grandchild; his sisters, Marie Gallagher and Marilyn (Dick) Musser; and his brother, Bill (two brothers preceded him in death). LeRoy will also be missed by his nieces, nephews, and other relatives and friends, as well as the many WICPA members and employees who worked with him over the years.

Memorials to LeRoy may be made to the WICPA Educational Foundation, the Alzheimer’s Association or St. John Vianney Church in Brookfield.

The 2018 WICPA Past Presidents and Executive Directors.

LeRoy at the WICPA Brookfield office.

LeRoy at the 1996 150-hour bill signing.

Kenneth J. (Ken) Brosig, CPA (1947 – 2022) Kenneth J. (Ken) Brosig, CPA, age 74, of De Pere, passed away on Tuesday, April 19. Brosig graduated in 1965 from De Pere High school, where he was named All-Metro on the football team. After graduating from the University of Wisconsin–Whitewater in 1969 with a degree in accounting, he earned his CPA certificate. Three months after graduation, he was drafted into the U.S. Army and served at Ft. Riley (Kansas) from 1969 to 1971. Brosig worked for the Wisconsin Department of Revenue as a tax auditor for 33 years, retiring in 2003. He is survived by his wife of 48 years, Janet; three sons and one daughter; six grandchildren; one brother and two sisters; many nieces and nephews; and other relatives and friends. John Hager, CPA, JD (1958 – 2022) John Hager, CPA, JD, age 63, passed away on Monday, April 18. He was a founding member of the law firm Hager, Dewick & Zuengler S.C. in Green Bay. Hager received his accounting degree from Marquette University in 1979 and his Juris Doctorate from Marquette University Law School in 1982. He was very proud of having founded and managed two business and estate-planning law firms in the Green Bay area, both of which grew to be among the largest in northeastern Wisconsin. Hager was a supporter of his community in many ways, including serving as coach of his children’s sports teams in De Pere. He was a recipient of several awards recognizing his community involvement, including the Green Bay Packers Community Quarterback Award in 2013 and the Wisconsin Hospital Association Award in 2017, both of which recognize the extensive and lifelong involvement he had at St. Vincent Hospital, St. Mary’s Medical Center and Prevea Clinic. In 2020, Hager received the Leo Frigo Award from the Green Bay Area Chamber of Commerce Leadership Green Bay Program. Hager is survived by his wife of over 40 years, Charlotte; three children; three grandchildren; a sister; nieces, nephews and other extended family members. Kenneth A. Larsen Sr., CPA, CGMA (1951 – 2022 ) Kenneth A. Larsen Sr., CPA, CGMA, 71, of Green Bay, passed away on Friday, May 13. Larsen was a graduate of Denmark High School and attended Northern Michigan University, earning his Bachelor of Science degree in accounting. After graduation, he passed the CPA Exam and became licensed as a CPA. He began his career in 1973 as a senior accountant with Jonet, Fountain, VandeLoo and Glaser CPAs in Green Bay. In 1976, he joined the firm of Shinners, Hucovski and Co. S.C. in Green Bay. In 1995, Ken became the CFO of Hoida Inc. and HDM Inc. in De Pere. From 2006 to 2008, he served as CFO of Portside Builders Inc. Coinciding with his full-time career in accounting, he started K.A. Larsen Consulting, which he operated until recently. Larsen served as an outside director of Denmark State Bank and Denmark Bancshares Inc. and was very active at Atonement Lutheran Church. He is survived by his loving wife, Carole; two children; three grandchildren; two brothers and three sisters; and many other relatives and friends.

Bradford Macfarlane, CPA (1955 – 2022) Bradford Macfarlane, CPA, age 67, of Portage, passed away on Sunday, April 17. Born and raised in Beaver Dam, Macfarlane attended UW–Madison, graduating with an accounting degree in 1977. He obtained his license as a CPA in 1982 and went to work as an accountant for Cost Cutters, which is now owned by Minneapolis-based Regis Corp. Bradford was a member of Fort Winnebago Masonic Lodge #33 F&AM, Portage, and enjoyed traveling the U.S. with his mother after retirement. He is survived by a niece and nephew, other relatives and many friends. Dennis Sampson, CPA (1944 – 2022) Dennis Sampson, CPA, age 77, passed away on Tuesday, April 12. Born and raised in Pennsylvania, he met his wife during a study abroad program in Germany in 1964. Sampson graduated from Allegheny College and went on to earn a Master of Library Science degree at Western Michigan University. While working as a librarian at Indiana’s Manchester College, he completed an MBA from Ball State University. Sampson and his wife moved to Wisconsin in the early 1980s, and Sampson embarked on a career with the American Baptist Homes of the Midwest, retiring while serving as director of Tudor Oaks Senior Living Community in Muskego. In retirement, he served as interim director or director for several Waukesha County libraries and senior living communities and also prepared taxes seasonally as a CPA with Nolan Accounting. He served on many boards and committees, including American Baptist Churches of Wisconsin, Milwaukee Christian Center, Pewaukee Village Board, Whitnall Park Rotary Club, Friends of Boerner Botanical Gardens, Pewaukee Area Historical Society, Pewaukee Public Library Foundation and the Community Development Block Grant Committee. He is survived by his wife of 55 years, Kathy; one son and two daughters; three grandchildren; a brother; and other relatives and friends.

If you are aware of a member obituary and believe it should be included in Memorials, please send a copy of the obituary or contact Marcia Tillett-Zinzow at mtzinzow@icloud.com.